Thursday, 7 July 2022
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•          Markets yesterday still faced conflicting signals as they tried to assess the mutual interference between growth and inflation. The outright (European) recession panic that dominated trading earlier this week eased even as there was little in the way of hard news. European equities rebounded up to 2%. Still, European interest markets and the euro showed underlying doubts on the growth outlook as uncertainty on the region’s energy supply continues to linger. The German curve steepened with yields in the 2-5-y sector easing another 4/5 bps. 10’s and 30’s rose 2.5 bps. The key 1.18/1.16% support area for the German 10-y yield was extensively tested intraday, but survived at the close (1.206). This intraday reversal was mainly US driven. The US services ISM eased less than expected from 55.9 to 55.3. The employment index dropped further below 50, but other activity subindices still suggest decent growth going into H2. Later in the session, US yields rose further as the Fed in the minutes of the June meeting reiterated its strong commitment to prevent inflation running further out of control. At the end of the day, the US yield curve bear flattened with yields jumping higher between 18.3 bps (2-y) and 11.9 bps (30-y). This move occurred even as oil extended its decline (brent below $100 p/b), further easing inflation expectations. The trade-weighted dollar touched a new cycle top near 107.25 but this move already occurred earlier in the session. The ‘hawkish’ Fed Minutes didn’t provide additional support for the US currency. USD/JPY on the publication of the better than expected ISM reversed early intraday weakness to close marginally stronger at 135.95. USD strength still was accompanied by ongoing euro weakness. EUR/USD recorded follow-through losses after Tuesday’s break below the key 1.0350/41 support area (close 1.0182). This euro weakness was also visible in the EUR/GBP cross rate. However, sterling drew some additional support from comments of BoE Chief economist Phill as he said the Bank is prepared to step up the pace of rate hikes at the August meeting. EUR/GBP now clearly lost the upward sloping trend channel that was in place since mid-April to close at 0.8538 (from 0.8593).   

•          Today, the US trade balance and the jobless claims are no game-changers. Tomorrow’s payrolls are the next reference. In Europe, the account of the June ECB meeting will be published. After recent growth fears, the report might help to rebalance the market focus back to the bank’s anti-inflation crusade. Especially the internal debate on the necessity of a 50 bps hike in September is worth looking at. On the interest rate markets, key support levels for the US (2.70% area) and the German 10-y yield (1.15%) proved not that easy to break. We look out for a bottoming out process. Whether the ECB-inflation commitment will be able to change fortunes for the single currency is far less sure. For now, there is no sign at all that the EUR/USD cross rate will be able to break the sell-on-upticks dynamics.

News Headlines

•          Hungarian deputy governor Virag indicated that the central bank would react decisively today by raising its one-week depo rate. Financial market developments of recent days raise inflation risks and unequivocally threaten price stability. The latter is MNB-slang for raising the forint alarm bells. The nearby war in Ukraine, accelerating inflation, the MNB’s stop-and-go tightening approach and increased market volatility pushed the forint to new all-time lows of EUR/HUF 416 yesterday. The pair closed at 410 following Virag’s comments. Hungarian money markets take into account a double digit policy rate in the very near term, with a rate of around 12.5% over a 12-month horizon. The one-week deposit rate (and base rate) both stand at 7.75% currently. Apart from the Hungarian decision, CE markets will keep a close eye on the rate decision by the National Bank of Poland (+100 bps or even more?!) and by the Czech National Bank’s determination in defending the koruna (at EUR/CZK 24.75) following a 2-day national holiday.

•          People close to the matter indicate that the G7 is discussing trying to cap the price on Russian oil between $40 and $60/barrel. They would do so by banning insurance and transportation services needed to ship Russian oil and petroleum products unless it is bought below an agreed price. The indicative range is guessed to be Russia’s marginal cost of production. Oil prices didn’t escape the recession fears in the past sessions, crashing from $115 to $100/b in just two days’ time.


The ECB finally turned the corner in its inflation narrative. The central bank ended net asset purchases, facilitating rate hikes from this month. Real yields took over from inflation expectations, pushing the German 10-yr yield to its highest level since early 2014. The move ran into resistance at 1.9% (50% retracement on long term decline) before correcting lower. First important support at 1.18%/1.15% is under test as recession fears mount.

The Fed started tightening and published an aggressive blueprint for the remainder of the year. A second 75 bps rate hike in July is likely. Quantitative tightening will hit max speed by September. Anticipation on even faster Fed tightening pushed the 10-y yield to a new multi-year high of 3.5%. Short-term correction is in store with 2.72% marking a firm bottom.

EUR/USD tested the 2017 low at 1.0341 in May and June. The pair (temporarily) rebounded mainly as the broader dollar rally took a pause. EUR/USD 1.0806 resistance proved one step too far, even as the ECB formally announced to start hiking rates. Growing recession fears, finally hammered EUR/USD below 1.0341, opening the way for a return to parity (or lower?).

The developing cost-of-living crisis seems to hit the UK economy first and the hardest. Weak economic data toughen the Bank of England’s dilemma in battling inflation with doubts filtering through in markets. The BoE in June signaled it might step up tightening, but it is unsure whether this will change fortunes for sterling. The standing uptrend is at risk but this for an important part is due to euro weakness.

Calendar & Table

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This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.

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